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Global Affairs Blog

The Trans-Pacific Partnership: A Promoter of Regional Integration

By: Warner Sallman, L’17

 

On October 4, 2015, the leadership of the twelve countries in talks over the Trans-Pacific Partnership (TPP) – Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam – announced the conclusion of negotiations. In its current configuration, the TPP took over seven years to negotiate. The goal of these negotiations was straightforward: to produce a comprehensive agreement that would set the new standard for 21st-century trade negotiations, linking countries spanning 4 continents, whose trade accounts for 40% of global trade flows.[1] This multilateral mega-agreement emerges in a political-economic climate that has favored country-to-country free-trade agreements, as the Doha Round of trade negotiations has stalled out at the World Trade Organization.

 

Notably, the People’s Republic of China was not party to the negotiation, and lead proponents of the agreement, including President Obama, have argued that the success of the TPP is a crucial tool in the U.S.’s strategic rebalance to the Asia-Pacific, as a counterweight to growing Chinese influence in the region.[2] Studies produced by the Peterson Institute of International Economics and the People’s Bank of China indicate that in the short term, China could see a GDP slowdown of nearly .3%, and that China’s textile and electrical equipment manufacturing sectors in particular could be negatively impacted.[3]

 

Yet while China was initially hostile to the TPP, it has softened its attitude considerably and remains cautiously optimistic that the agreement will benefit the region.[4] In fact, China has sought to promote its own regional trade agreement, the Regional Comprehensive Economic Partnership (RCEP) and other Asia-Pacific free-trade agreements. These actions should be welcomed, because the competing tracks present an opportunity for smaller countries to choose whom to partner with and how to participate in the global trade regime. They also bode well for the prospects of the eventual economic integration of the region.

 

In short, the TPP should not be viewed as a strategic “counterweight” to Chinese influence. The agreement is important not only for the trade benefits that the U.S. will receive, but also because it promotes competition among the larger powers’ vision for economic integration in the Asia-Pacific region, conferring greater choice and legitimacy to the emerging economies.

 

A Competitive Model Produces Beneficial Results

            Although the U.S. already has free-trade agreements (FTAs) with over half the TPP countries, the inclusion of Japan, Malaysia, and Vietnam in particular will help generate significant economic benefits. Estimates show that U.S. income gains under the TPP “would reach $59 billion per year by 2020 and would continue to grow thereafter…to $78 billion per year by 2025.”[5] These estimates only increase with the inclusion of countries such as South Korea, who have expressed interest in joining the TPP.

 

            In the short-term, China is predicted to lose out if it chooses to remain outside the TPP framework. China is at risk from both trade diversion and preference erosion. The country has many FTAs with TPP countries, but under the TPP this advantage will disappear, since many of the preferential positions will also be granted to other countries. Furthermore, some of China’s competitors in the manufacturing sector would gain preferential access to U.S. markets, resulting in trade erosion as the U.S. chooses to trade with these countries instead.[6] This effect is predicted to be particularly pronounced in the textile and electronics-manufacturing sector.[7] In fact, Ma Jun, the chief economist of the PBOC, predicts that China’s economy would be 2.2% larger if it joined the TPP. From a purely economic perspective, the TPP appears set up to bring significant benefits to those countries party to it, potentially at the expense of the countries outside the agreement.

 

            Given the potential trade distortions arising from the TPP, some scholarly models would predict that the U.S.- Chinese relationship would be strained, and that conflict could arise between China and one of the TPP partners.[8] Yet instead China has offered cautious support for the agreement, while simultaneously pursuing its own series of multilateral regional agreements. The RCEP, and similar agreements, present China’s vision for regional integration, essentially a competing model to the TPP. Importantly, both agreements will allow for latecomers to join the agreement, creating a flexible platform for further integration of new parties. Countries can choose whether to become a member of one agreement, both, or neither, which encourages some level of differentiation and openness to new members. This competition of agreements could spur even greater economic integration and offers less powerful countries greater bargaining strength and autonomy within the trading regimes.

 

            Although the TPP and RCEP will produce economic gains for their members, models of various agreement configurations demonstrate that the greatest economic gains from any framework come when both the United States and China are members.[9] In essence, the aggregate gains of each agreement are multiplied when both countries are brought within one system. Although both China and the U.S. seek to control the agenda and priorities of these agreements by keeping the other out of the negotiation phase, which the U.S. has successfully done, the economic case for integration of the separate regimes may be too persuasive to ignore, and the pull toward integration will only strengthen as the TPP and RCEP rosters increasingly overlap. One potential vehicle is the more comprehensive Free Trade Agreement for the Asia-Pacific, which has received some support. It could eventually become an “umbrella agreement” that takes the most beneficial policies from both to integrate the various members.

 

            Finally, emerging economies will undoubtedly benefit from the competition of agreements. As Professor William Burke-White has illustrated in a recent article, China and the U.S. operate as “hubs” within the international system, and by creating trading “subsystems” in direct competition, “non-hubs” (i.e., small economies) are empowered “with choices as to which hub to follow on any given issue.”[10] This gives smaller countries leverage in terms of negotiation of provisions within the agreements. Also, the traditional power-influence advantage is subverted because countries can choose to participate in whichever agreement fits their best interest. As a result, each agreement has greater legitimacy for smaller countries, as their participation is not dictated through traditional power politics.

 

Conclusion

            The TPP is only the most recent entrant in the “noodle bowl” of free-trade agreements that connect various Asian countries to the United States. If ratified, it will become one of the largest free-trade regimes the United States has joined since the establishment of the WTO and will tie its interests closer to its TPP partner countries. Although the TPP excludes China, and China is promoting its own multilateral agreement, the competition should not be construed as the usual type of geopolitical power politics, despite the narrative often told in the U.S. media. Rather, the TPP and RCEP compete productively. They create parallel but open systems that will have increasingly similar membership, which will likely prove the prelude to a more comprehensive agreement, given the potential economic benefits of including the world’s two largest economies within the same framework. The competition also gives smaller countries greater choice in trade participation, which bolsters the legitimacy of any agreement. Instead of adding another point of friction to the U.S.-China struggle for influence in the Asia-Pacific, the TPP could prove to be a powerful promoter of greater economic integration.

 

[1] Silver, Drew. “The facts and figures behind proposed trans-Pacific trade deal.” Pew Research Center. April 25. 2014. http://www.pewresearch.org/fact-tank/2014/04/25/the-facts-and-figures-behind-proposed-trans-pacific-trade-deal/

[2] U.S. President (Obama), “Remarks by the President in State of the Union Address,” January 20, 2015, http://www.whitehouse.gov/the-press-office/2015/01/20remarks-president-state-union-address-january-20-2015

[3] Petri, Peter A. and Michael G. Plummer. “The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications.” Peterson Institute for International Economics. Number PB12-16. June 2012.

[4] “Once Concerned, China Is Quiet About Trans-Pacific Trade Deal.” The New York Times. April 28, 2015. http://www.nytimes.com/2015/04/29/business/international/once-concerned-china-is-quiet-about-trans-pacific-trade-deal.html

[5] “National Economic Interests.” Peterson Institute for International Economics. http://www.piie.com/publications/chapters_preview/6642/06iie6642.pdf

[6] “National Economic Interests.”

[7] “China Misses Out From TPP Exclusion, PBOC Research Ma Says.” Bloomberg News. October 8, 2015. http://www.bloomberg.com/news/articles/2015-10-09/china-misses-out-from-tpp-exclusion-pboc-researcher-ma-says

[8] Peterson, Timothy M. “Insiders versus Outsiders: Preferential Trade Agreements, Trade Distortions, and Militarized Conflict.” Journal of Conflict Resolution. Vol. 59, No. 4. June 2015. http://jcr.sagepub.com/content/59/4/698

[9] Petri, Peter A., Michael G. Plummer, and Fan Zhai. “The TPP, China and the FTAAP: The Case for Convergence.” May 19, 2014. http://bit.ly/1NjpUss

[10] Burke-White, William. “Power Shifts in International Law: Structural Realignment and Substantive Pluralism.” Harvard International Law Journal. Vol. 56, No. 1, Winter 2015. pp 32.

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